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Transfer Pricing & Role of Terminologies governing the Indian Transfer Pricing RegulationsCompany Secretary Associated Enterprise:A Company Secretary holds a key position in any Company as the Two companies can be said to be AEs when there is direct orCompliance Officer of the Company. A Company Secretary is indirect participation in management, control or capital by oneresponsible for all regulatory compliances of Company. A Company enterprise in other enterprise or by the same person in twoSecretary supervises the finalization of Annual Accounts of a enterprises.Company and is also a party to sign the Balance Sheet when a The participation in management, control or capital can be throughCompany Secretary is employed by the Company. A Company direct or indirect equity holding, control over the board of directors, orSecretary has to ensure that all disclosures with respect to financial appointment of one or more executive directors by one enterprise instatements, company law compliance, taxation, audit, related party other enterprise or by the same person in two enterprises.disclosure, etc. has been disclosed and that the financial statementgives a true and fair view of the financial performance of the Situations like granting of loan more than 51% of the book value ofCompany. assets, giving guarantee of more than 10% of the total borrowings of the other Company, complete dependence on know-how, patent, etc.As per the Income Tax Act, any income (expenses) arising from an of the other Company, or purchase of raw materials from theinternational transaction (or specified domestic transaction) with an other Company greater than 90% of the total raw material purchasedAssociated Enterprise shall be computed having regard to arm’s by the Company during the year, or one entity has more than 10% oflength price. Accordingly, it is imperative for the Company Secretary the beneficial interest in a partnership firm, association of persons orto understand certain terminologies governing the Indian Transfer body of individuals triggers the deemed fiction and the two entitiesPricing Regulations and there role in the same. will be deemed to be AE irrespective of the fact that there is no direct or indirect participation in management, control or capital within the enterprises.
• a transaction of business restructuring or reorganization, enteredInternational Transaction: into by an enterprise with an AE, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date;An international transaction means a transaction between two ormore AEs, in the nature of purchase, sale or lease of tangible or • Further, Finance Act 2012 has also clarified that an intangible assetintangible property, or provision of services, or lending or borrowing shall also include marketing related intangible such as trademarks,money, or any other transaction having a bearing on the trade names, brand names, logos, etc; technology relatedprofits, income, losses or assets of such enterprises, and intangible such as process patent, patent application,shall include a mutual agreement or arrangement between two or technical documents and know-how; artistic related intangible suchmore AEs for the allocation or apportionment of, or any contribution as literary works and copyrights, musical compositions; datato, any cost or expense incurred or to be incurred in connection with processing related intangibles such as proprietary computera benefit, service or facility provided or to be provided to any one or software, software copyrights, automated databases;more of such enterprises. engineering related intangible such as industrial design,Finance Act 2012 has now clarified that an international transaction product patent, trade secrets, engineering drawings and schematics,shall also include the following: blueprints; customer related intangible such as customer list, customer contracts; goodwill related intangible such as institutional• capital financing, including any type of long-term or short-term goodwill; professional practice goodwill, celebrity goodwill, etc.borrowing, lending or guarantee, purchase or sale of marketablesecurities or any type of advance, payments or deferred payment or Specified Domestic Transactionreceivable or any other debt arising during the course of business; TP until now was applicable to companies having cross border• provision of services, including provision of market research, transactions with their AE. However, Finance Bill 2012, honoring themarket development, marketing management, administration, supreme court ruling in case of CIT vs. M/S Glaxo Smithkline Asiatechnical service, repairs, design, consultation, agency, (P) Ltd. (Special Leave to Appeal (Civil) No(s).18121/2007),scientific research, legal or accounting service; expanded the ambit of TP to specified domestic transactions w.e.f 01 April 2013.
Transactions covered under the ambit of domestic transfer pricing: undertaking specified business activities (under section 80A, 80- IA, etc.) will be covered.• Any expenditure in respect of which payment is made or is to bemade to a person referred to in The most likely affected industries are industries operating in SEZs,Section 40A(2)(b) of the IT Act; infrastructure developers and / or infrastructure operators, telecom services industries, industrial park developers, power generations or• Any transaction that is referred to in Section 80A; transmission, etc. Apart from these industries, the business conglomerates having significant intra-group transactions would• Any transfer of goods or services referred to in Section 80-IA(8) i.e. be impacted.applicable to companies operating as industrial undertaking orenterprises engaged in infrastructure development; Most likely transactions under the scanner of the TP Authorities would be:• Any business transacted between the assessee and other personas referred to in section 80-IA(10); • Interest Free Loans to group companies;• Any transaction, referred to in any other section under Chapter VI-A • Granting of Corporate Guarantees / Performance Guarantees byor section 10AA, to which provisions of sub-section (8) or sub- Parent Company to its subsidiaries;section (10) of section 80-IA are applicable; • Intra-group purchase / sell / service transactions;• Any other transaction, as may be prescribed by the board. • Payment made to key personnel of the group companies;Provided that the aggregate value of the transaction entered into by • Payment made to relatives of key personnel of the groupthe assessee with its domestic AE exceeds Rs. 5 crore. companies.Implication of such amendment by Finance Act, 2012:All the transactions entered into by the taxpayers operating in Arm’s Length Price:Special Economic Zones (‘SEZs’); taxpayers enteringinto transactions with certain related parties specified under section An arm’s length price, is a price at which a transaction is entered into40A(2) and all the taxpayers claiming profit based deductions for by a Company with a third party under normal market / economic conditions, i.e. without the influence of the relation between the
parties. The principle of arm’s length pricing requires a Company to In case of Companies not having international transactionsenter into a transaction with its AE similar to a transaction it has but have domestic transactions with related parties equalentered into or would have entered into with a third party under to or more than Rs. 5 crore or companies whoseuncontrolled conditions. present domestic transaction less than Rs. 5 cr but is likely to increase beyond Rs. 5 crore in the financial year 2012-13,Role of Company Secretary in Transfer Pricing:- Company Secretary of the said companies are advised to validate their present business model and pricing The prima-facie role of a Company Secretary is to methodology from a transfer pricing perspective which will identify and ensure that all the AEs with whom the Company enable them to take proactive actions, if necessary. has transacted during the year have been considered keeping in mind the penal consequences of non-reporting of The company Secretary should also ensure that the Transfer a transaction which are as high as 2 % of the total value of Pricing Accountant Report is filed with the income Tax transaction that went unreported. department before the due date of filing of the return of income i.e. 30 November. Whenever a Company is proposing to enter into any new international transactions, a Company Secretary should liaise with the concerned Company’s officials and ensure that an appropriate advise from a transfer pricing experts have been taken as to what should be an appropriate arm’s length price for entering into such international transactions. A-380, Defence Colony, New Delhi –110024 When the transactions are of recurring nature the Tel: +91-11-4980-0000 Company Secretary should liaise with the concerned Fax: 91-11-4980-0088 Email: email@example.com Company’s officials and ensure revisiting their pricing model www.spnagrath.com on a reasonable concurrent level which will help in demonstrating that the transfer pricing documentation are maintained on a contemporaneous basis.